Cheap Talk about Specific Investments

Joseph Farrell () and Robert Gibbons

The Journal of Law, Economics, and Organization, 1995, vol. 11, issue 2, 313-34

Abstract: We consider a problem in which a buyer has private information about the efficient scale or nature of a relationship-specific investment by a producer. We show that reducing the producer's ex post bargaining power may enhance efficiency by providing incentives for the buyer to reveal his private information before the investment is made. This consideration can outweigh the well-known "hold-up" problem that arises if the producer does not have all the bargaining power. Copyright 1995 by Oxford University Press.

Date: 1995
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